How to Apply for a FIRPTA Withholding Certificate

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted to ensure foreign sellers of U.S. real estate meet their tax obligations. Under this law, the buyer is required to act as a withholding agent, withholding a percentage of the gross sales price to cover the seller’s potential tax liability. The standard rate is 15%, but it is reduced to 10% if the price is between $300,001 and $1,000,000 and the buyer will use the property as a residence. For a residence priced at $300,000 or less, withholding is 0%.

This FIRPTA withholding is a prepayment, not a final tax. Because it is calculated on the gross price instead of the seller’s actual profit, it can result in a significant overpayment. To prevent this, a foreign seller can apply for a FIRPTA withholding certificate from the IRS to authorize a reduced withholding amount.

Grounds for Requesting a Certificate

The IRS provides specific circumstances for issuing a withholding certificate. The most common reason is that the required withholding on the gross sales price exceeds the foreign seller’s actual U.S. tax liability on the gain. Tax is owed on the gain, which is calculated by subtracting the seller’s adjusted basis (original purchase price plus capital improvements) from the sales price.

The actual tax owed depends on whether the gain is short-term or long-term, with long-term gains taxed at more favorable rates. For instance, the 15% withholding on an $800,000 sale is $120,000. If the seller’s actual long-term capital gains tax is only $30,000, they have valid grounds to apply for a certificate to lower the withholding to their estimated maximum tax.

Other situations also qualify for a withholding certificate. A foreign seller may be exempt from U.S. tax on the gain due to a provision in a tax treaty. The transaction might also qualify for a nonrecognition provision under the Internal Revenue Code, such as a like-kind exchange. Another basis is when the seller enters into a formal, secured agreement with the IRS for the payment of the tax.

Preparing the Application Package

The application process centers on IRS Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests. This form is the official request to reduce or eliminate the withholding and requires information from all parties to verify the request.

The form requires the full legal names, addresses, and U.S. Taxpayer Identification Numbers (TINs) for both the foreign seller and the buyer. If a seller does not have a TIN, they must apply for one using Form W-7, Application for IRS Individual Taxpayer Identification Number, and attach it to the Form 8288-B application. The application must also include a description of the property, the date of transfer, and the contract price.

A part of the application is establishing the basis for the request. If the request is based on the seller’s maximum tax liability being lower than the standard withholding, a detailed calculation must be provided on the form. This section of the form is essentially a mini tax return for the transaction.

The IRS requires supporting documentation to validate the claims. A copy of the executed sales contract is required, along with evidence of the property’s basis, such as the original settlement statement and receipts for capital improvements. Documents supporting a tax treaty or nonrecognition claim must also be included.

The Submission and Approval Process

The completed Form 8288-B and all supporting documents must be submitted to the IRS no later than the actual date of the property’s closing. It is advisable to submit the application as early as possible, as the IRS takes up to 90 days to process the request. The seller or their agent must provide written notice to the buyer on or before the closing day that an application has been filed.

While the application is pending, the buyer’s obligation to withhold is not eliminated. The buyer, or more commonly the closing or escrow agent, must set aside the full withholding amount from the seller’s proceeds at closing. These funds can be held in an escrow account pending the outcome of the application.

The IRS will review the application and may issue a withholding certificate, which will state the specific amount, if any, that must be withheld. The IRS may also reject an incomplete application or send a request for additional information.

Upon receipt of an approved certificate, the escrow agent follows its instructions. They remit the required amount to the IRS using Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A. Any excess funds held in escrow beyond the amount stipulated on the certificate are then released to the foreign seller.